Feds deny pleas for pension funding relief

Staff | August 7, 2012

A group of six Canadian corporations has banded together in the hopes of receiving pension assistance from the Canadian government. But the federal Conservatives aren’t answering the call, reports Reuters.

The group—which consists of Canadian Pacific Railway, Canadian National Railway, Bell Canada, MTS Allstream, Canada Post and NAV Canada, and is branding itself the “G6”—is requesting legislated measures such as more time to pay down deficits within their DB plans.

In the U.S., President Barack Obama recently signed a bill that allows struggling companies to contribute less to their pension plans. But Ottawa says it has no plans to follow suit.

“[T]hese are pension funds that need to be worked out between the employers and their employees,” Finance Minister Jim Flaherty told Reuters. “It’s a private matter, except that there’s a legislative vehicle in place, if they want to follow the distressed pension plan model. There’s a way of proceeding.”

Flaherty was referring to the reforms introduced in 2010 that brought relaxed funding requirements to struggling plans. But many companies, such as those in the G6, say its not enough.

Register today

It’s true… pension funding relief would not only provide short-term benefits to struggling corporations in Canada and abroad but also increase tax revenue. However, unpopularity and postponed (or reduced) tax revenue notwithstanding, regulators in Canada have nonetheless wisely chosen to provide funding relief on a case by case basis, post-valuation, rather than following in the footsteps of fellow regulators to the south who have opted to ‘tweak’ the funding valuation process and smooth an already smoothed discount rate – incidentally, this recently adopted US legislation was attached to the end of a major US highway bill, with little or no pension oversight. If you’re going to allow smoothing, especially over long periods, then you might as well go “full Monty”, remove the solvency valuation altogether, and simply use expected long-term rate of return on portfolio assets. The solvency liability includes benefits accumulated to date (i.e. already owing) and should be valued in a manner consistent with the market value of those benefits. Where there is a case for providing relief, and it’s prudent to do so, regulators can then allow sponsors to delay the funding of the current wind-up liability (extend amortization periods, allow for letters of credit, etc.) but to simply increase, or smooth, the market related discount rate in the valuation process is a misleading exercise.

If you want to smooth contribution requirements, you need to smooth contribution requirements, not fiddle with interest rates. By ‘adjusting’ interest rates, you’re just making numbers up.

Transparency in the pricing and valuation of long-term entitlements has many benefits, to name a few:

Increases the stability of benefits
Accurately prices the incremental cost of future entitlements
Provides a systematic way of prudently funding over the long-term
Reduces intergenerational inequity and political gaming